Americans are opening their wallets again – but not too wide

Businesses say they see significant gains in sales, but consumers burned by the recession remain wary.

Marie Galvin, owner of Galvin-ized, a custom hattery in Boston, places a hat on a customer. Galvin said shopping in her store has greatly increased this year. Indicators show ordinary Americans are feeling better about the economy and starting to spend more.
Kevin G. HallMcClatchy

Ken Goldstein, a senior economist at The Conference Board in New York, talks Aug. 12 about the comeback of the American consumer.
Kevin G. HallMcClatchy

Written off in the aftermath of the Great Recession, the U.S. consumer is back.

Not quite with a vengeance, but definitely back.

It’s noticeable to Marie Galvin, owner of Galvin-ized in Boston, where handmade women’s hats – a discretionary purchase – sell for anywhere from $35 to $85.

“This year, since the Kentucky Derby, it all seems out of control. Everybody was shopping for good hats,” said Galvin, who wears her wares on the sales floor. “I think it’s up a good 50 percent from last year.”

Same is true for Ron Lewis, owner of Designer Cabinetry in Newton, Mass. His customers often spend $40,000 to $80,000 for high-end kitchen cabinets and appliances.

“It’s been a slow improvement until this year, where there has been a marked improvement,” said Lewis. “The people with money have more money than ever.”

Nationally the story is largely the same, whether it’s in the finance-rich suburbs of Charlotte, N.C., the sun-kissed condos of Miami or the most populous state, California, where the jobless rate is falling. Consumption powers about two-thirds of all U.S. economic activity, and it’s noticeably back.

Spending by the rich never tailed off, and it accelerated alongside the soaring stock market gains of recent years. On the bottom economic rungs, the poor still struggle. So much so that Dollar Tree and Family Dollar recently announced plans to merge to compete against Wal-Mart for what Family Dollar CEO Howard Levine called “a more financially constrained consumer.”

But across the broad middle of the income spectrum, a bevy of indicators shows that ordinary Americans feel better about the economy and are loosening the purse strings. The most obvious example is car sales, on pace to exceed 16.3 million this year.

“It gets better all the time, but it’s not even,” said Michelle Krebs, an analyst with AutoTrader.com.

July retail and food sales are 3.7 percent above July 2013 levels, the Census Bureau reported earlier this month, 6.4 percent higher for autos and other motor vehicles.

Rob Gagne, a longtime resident of the blue-collar Boston neighborhood of Dorchester, feels better about the economy. The jack-of-all-trades employee of an architectural firm is prototypical middle class. But he’s splurging on a $2,100 custom-made bed, and after several years of belt tightening, he recently treated himself to a cross-country motorcycle trip.

“I wouldn’t have been able to do that. It does take some money to do that,” he said. “I probably could have, but wouldn’t have.”

Jobs picture improves

Jobs are another important signpost for future consumption.

There were 4.7 million job openings in June, the highest level since February 2001, and a signal that companies are more optimistic about their future and want to hire accordingly.

At the same time, roughly 2.5 million Americans quit their jobs last month, the highest since June 2008. That’s a good thing, because it means people feel confident they can take advantage of other job opportunities.

The number of people quitting “is highly correlated with consumer confidence, which is highly correlated with consumer spending,” said Ed Yardeni, a veteran investment strategist.

Another indicator is the Consumer Confidence Index, published monthly by The Conference Board, a business research group.

The group finds that people’s confidence in their current situation is finally matching their traditional optimism about the future.

“This is the consumer saying ... it finally has gotten better,” said Ken Goldstein, a veteran economist with the group.

The result? Goldstein said that pent-up consumer demand is about to be unleashed after several false starts.

“Finally, here it is, it’s finally happening,” Goldstein said.

Consumption would be even stronger if not for constraints. It’s growing an average of 2.2 percent a year since the recession ended in 2009. That’s healthy.

But it’s below the 2.9 percent annual average in the previous economic expansion from 2001 to 2007. People are still carrying a relatively high level of debt and can’t, or won’t, borrow more.

“That’s the reason why total spending is growing at a slower pace than people would have expected at this point – particularly since interest rates are so low,” said Kevin Logan, chief U.S. economist for HSBC Securities in New York. “It’s a big change of behavior.”

Many Americans also fret the lack of wage growth.

“People don’t believe their incomes are going to grow as fast as they did in the last cycle,” said Logan.

Wages are growing at an annual rate of about 2 percent, or about the same pace as inflation, so any gain in purchasing power has been offset by rising prices. Given a still-elevated unemployment rate, current workers can’t demand higher pay and further boost spending.

And consumers also remain wary after being burned in the recession.

“Even though it is several years ago, it has a lasting effect,” said Jack Kleinhenz, chief economist for the National Retail Federation, who added that “the ‘shop until you drop’ kind of thing, people aren’t in that kind of mode anymore.”

It’s not to say consumers aren’t spending – they are – but not with abandon.